The S&P 500 is on another tear, riding the type of bull run that makes advisors look forward to client annual statement meetings. If 2022’s annual returns were a punch in the face, 2023 and this year (so far) are a day at the spa.
Of course, while markets impact AUM and advisory firms’ profits, they are just one piece of the puzzle. And as the 2023 InvestmentNews Advisor Benchmarking Study reveals, 2022’s market downturn laid bare a stark fact – most firms are not growing their client base very well. Organic growth (attracting new clients) labored at 3.1 percent as many firms made a strategic shift to M&A.
The battle for market share in the RIA space is intense, but acquisitions can’t continue at this pace forever. The subsequent focus will intensify on operations and performance to ensure continued profitability and growth. If the markets let you down and you’re not acquiring or being acquired, how are you retaining and attracting new clients?
Doing this effectively and meaningfully is a skill that will dictate whether you succeed or fail. The study shows that the next battleground for firms is not in the M&A space but likely the war for talent. Exacerbating this is the fact that more clients are leaving one RIA for another. Competition for clients is, therefore, becoming a zero-sum game, making the winning advisors even more sought-after.
But here’s the problem: salaries are not increasing in lockstep with performance. The study reads: “While client retention remains high, we are worried about staff retention. Salaries have not grown much in five years, and while the demand for advisory talent should be high, actual hiring does not seem very vigorous. Firms are failing to increase compensation fast enough to keep up with inflation, and the result can be problematic for long-term retention of advisors.”
The study digs deep into advisory compensation, staffing, pricing, and profitability – you can subscribe by going to the Advisor Centre Dashboard section on investmentnews.com – but at a glance it reveals that when market performance and M&A are stripped away, growth is modest. Given the economic uncertainty, cost-of-living crisis, and still-fresh memories of the COVID crash, people are less willing to let an advisor take 1 percent of their returns.
RIA firms, therefore, must rethink how they sell themselves and, in doing so, better reward those top performers who bring in the clients (and AUM). The good news is that while profit margins took a hit in 2022, firms are still very profitable. That, and the rise in inflation, makes the stagnation of compensation hard to disguise.
With organic growth set to become more important as the M&A well dries up, this can’t go on. If you want top talent, reward it.
“2022’s market downturn laid bare a stark fact – most firms are not growing their client base very well”
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